Can you escape your rising house payment by letting the bank foreclose? Yes, but – and this is a huge “but.” Allowing a first mortgage or deed of trust to foreclose, in most states, probably won’t wipe out a second deed of trust or mortgage or Home Line of Credit. You’ll still be responsible for those payments.
What’s worse is that a foreclosure without proof of insolvency generates a tax bill from the IRS for the “income” you receive by not having to pay the debt! There’s just such a story in the New York Times, today. As you can see in the story, proving “insolvency” to the IRS (like proving anything to our government) isn’t too easy, though it can be done.
The best answer, however – file bankruptcy. It will wipe out any obligation under a second mortgage or deed of trust, and the IRS will accept that as proof of insolvency so there won’t be a huge tax bill generated.
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